The big breakup

CEO John Flannery is spinning off the ailing $111 bln conglomerate’s healthcare unit and selling Baker Hughes, ending more than a century of growth. Focusing on aviation and power has risks, but the plan slashes debt and makes GE manageable. It was Flannery’s only logical choice.

Context News

General Electric on June 26 said it would spin off its healthcare division and “pursue an orderly separation” from its 62.5 percent stake in oil services company Baker Hughes. That would leave GE as a leaner group focused on aviation, power and renewable energy.

GE plans to sell 20 percent of the healthcare division and spin off the remaining 80 percent to shareholders over the next 12 to 18 months. The company will fully separate its controlling interest in Baker Hughes over two to three years.

The remaining GE will have a smaller headquarters dealing with strategy, capital allocation and governance. As a result, corporate overhead costs should shrink by $500 million by 2020.

The company said it plans to reduce net industrial debt by $25 billion by 2020 and maintain more than $15 billion in cash on the balance sheet. It said it is targeting a ratio of 2.5 times net debt to EBITDA and a single-A long-term credit rating. It also said it plans to maintain its current quarterly dividend of 12 cents a share.

Additionally, Larry Culp, the former chief executive of Danaher who joined GE’s board earlier this year, will take over as lead director from Jack Brennan.